Pros

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Pros Cons of Privatization in Egyptian Banking
System
Dr. Fouad Shaker Secretary General Union of
Arab Banks

• MENA - OECD Investment Programme
• National Investment Reform Agenda of Egypt
• workshop
• Cairo - Egypt 17 May 2006

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The Specificities of Privatization 1- Should be
managed within a declared vision based on a
national strategy. 2- The privatization
management process should be ready to deal
professionally with rational and/or irrational
rejection, be it in a good faith or
vice-versa. 3- In principle it should be
preceded by firm commitment from both political
leadership and acceptance in principal from labor
unions. 4- Should be implemented in a highly
transparent manner according to set-up legal
rules approved by concerned authorities. 5-
Should consider the interests of the labor power
in the present and the future.
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My Definition of Privatization - The
privatization is totally indigenous restructuring
process in a specific country whereby, it would
be assessed and interpreted through the
chronology of the socio-political developments
and their implications on the economic
situation Hence - There is no one approach of
privatization fits all. - What are considered
rules in a country are only guidelines for other
countries.
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Chronology of major socio-political events
concerned banks privatization in Egypt 1952 -
Military coup Détat (July 23 revolution) (The
six principals) of which
Terminating the control of capital on ruling
came as one of the said principals. Where
capital at that time was totally owned by private
sector. 1956 - Suez Canal Company
nationalization mobilization of public opinion
against foreign investment
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1958 - Egyptianization of Banks Ownership
deepening the public perception against foreign
investment in the financial system even for the
Arab ownership. 1960 -Nationalization of banks
and insurance companies. New role for banks to
finance the first national plan 1960-1965 without
competition among them and no role for private
ownership in financial institution. 1961 -Mass
Nationalization across the board for most of the
companies in all economic sectors. (Services,
Trade, Industry, Agriculture) Announcement of
socialism as a system for economic management in
Egypt.
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1964 -Merging 32 banks, to have only 5 banks
each of them allocated to serve specific
companies working in specific activity. Endeavorin
g to implement control by the unit of currency
like control by the role implemented in the
Soviet Union at that time. 1972 -The
establishment of Arab international bank. In the
form of private off-shore bank exempted from all
regulations other banks are subject to.
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1974 -The issuance of law 120 - Allowing
establishment of private bank and also foreign
banks to open branches. - Liberalize public
banks from rigid governmental regulations. -
Easing foreign exchange rules. - Strengthening
the authority of the central bank. - Public
banks established private banks in collaboration
with foreign or national private sector
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1981 -National conference of economic reform -
Infrastructure reform - Reform and modernization
of P.S.C - Allow private sector to work in some
sectors in a conditional way. (Ambiguous
economic identity and banking as well).
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1991 -Economic reform and structural adjustment
program with IMF - For the first time in the
recent history the country accepted and adopted
comprehensive economic program based on realistic
givens. - The program included explicitly
privatization among the policies to be adopted,
where privatization of industrial and commercial
companies would enhance the capabilities of
supply, and privatization of banks would enhance
demand side. - Although the program
achieved remarkable improvement specially
on the demand side, yet Egypt was very
reluctant to implement the privatization program
as planned to start on 1994.
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1996 -Privatization Starts In spite of the
commitment of the government to start on
aggressive privatization plan including banks
specifically one of the public sector banks, the
implementation results were disappointing (few
companies only). Much to ones surprise the
formal address to people from officials was not
expressing a favorable opinion towards
privatization.
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1997-2004 -Do-nothing government (No
comment) (Self explanatory state) In spite of
the shown competition from other countries to
attract private sector investments (FDI) Egyptian
government involved in huge public sector project
with the least effort of privatization and
sometimes denouncing privatization as an economic
approach. July 2004 -Present start of a new
era (dismantling 50 years of socialism) - Serious
and effective vision towards privatization. -
Banking Reform plan aiming to have a healthy
financial system that brings some public sector
banks to the point of sale.
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Cons of Banking Privatization in Egypt 1-
Negative cultural perception for privatization
among people. 2- Normal resistance from
opposition and labor force. 3- Investors fears
from the usual instability of laws and
regulations in Egypt. 4- The strong dominance of
public sector as investor in market place which
always threats leveling the playground.
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5- Insufficient transparency. 6- Slow movement
in supply and weak domestic demand for money -
weak contribution of banks to recovery process -
excess liquidity in banks. 7- The unfavorable
jurisdiction system.
Privatization Reforming State Owned banks
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8- Weaknesses of financial soundness indicators
average against other emerging markets. (2004/2005
figures)
9- The increasing government budget deficit
because of subsidy, specially in energy prices
which conduced to investment distortion.
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Pros of Public Banks Privatization in Egypt 1-
For the first time, new faces with no socialist
background, which means capable decision makers
for change management as required in strong and
transparent manner without being hindered by
precedent social commitment. 2- Widely
involvement of private sector in the economic
reform policies, explicitly and without a hidden
agenda.
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3- Young internationally experienced and well
educated decision makers. 4- Full political
support of the ruling national democratic party
(NDP). 5- The aggressive banking reform plan,
which includes, inter alia, strengthening
regulatory framework, good corporate governance,
selling or merging weak banks to well capitalized
and strong investors.
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6- The Existence of well prepared privatization
program, that is consistent with the overall
economic reform program and preserve the rights
of all parties. 7- To the first time, strong
formal commitment towards privatization (between
July 2004 and March 2005, 17 non financial
companies were privatized, generated proceeds of
LE 2,35 Billion.)
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Thank you